How to Start a Small Business

by E. James Burton, Ph.D., CPA, CFE

Every year, millions of Americans dream about starting their own business. And every year, a percentage of potential small business owners make their dream a reality. Unfortunately, as many as 50 percent of them find that dream turning into a nightmare as the business fails within the first year. There isn't much you can do to guarantee success but there are some measures you can take to improve the probabilities of success.

Obviously, an article as brief as this cannot address in detail all the problems a start-up business may encounter. In this brief article, we will deal with a few tips to help your small business start-up succeed. And, we will give you some sources where you can look for assistance with more specific problems. A side bar to this article contains some Internet sources you may want to review. Some of these sources provide information directly on the web; others may require you to order certain materials in published format.

Perhaps the best way to discuss how to start a business is to look at it as a process. That process has at least three distinct and necessary phases: The Dream; The Plan; and The Implementation. We will take each of these in order.

Assessing the Dream

Many people who start their own business do so for one of the following three reasons:

• I want to be my own boss.
• I want to choose when I work.
• I want to be financially independent.

Each of these is a powerful, motivating force and a good reason to dream. However, reality soon sets in when you actually get into business. First of all, every customer or client becomes your boss. If you do not find ways to accommodate their desires, you are soon out of business. At least at the beginning of a new business venture you MUST work very hard at making every available customer and client happy. You may not have a supervisor, but you will certainly have bosses.

Being in Business for Yourself Is Hard Work

Someone once said that being in business for yourself is great because you only have to work half days-any 12 hours per day you want. There is much truth in this. Starting a small business, particularly one on which you intend to rely for your livelihood, is likely to require 10 to 12 hours per day for six or seven days per week. At first, you may not be able to afford as much help as is really needed. You are likely to be doing two or three jobs yourself. Once the business has "closed for the day," you may still have ordering, bookkeeping, clean up and more.

Many people have achieved financial independence through starting a business of their own. Some, like Bill Gates or Sam Walton, achieve wealth beyond their wildest imagination. But many more have seen their life savings and the investments of friends and family lost. There is a financial risk in being in business for yourself. The legal form you choose for the business can help mitigate this risk. But, if you borrow money or have investors, you have "partners" and they will want to have a say in the business. Generally, financial independence from the small business is several years away.

Take an Honest Look at Your Dream

The U. S. Small Business Administration publishes several items that are valuable to those thinking about going into business. One of these is the "Checklist for Going into Business" (Management and Planning Series #12). As a part of "Assessing the Dream," you can use this "checklist" which has the following sub-sections: Identify Your Reasons; A Self-Analysis; Personal Skill and Experience; Finding a Niche; Is Your Idea Feasible; and Market Analysis. In each section, there is a list of simple but very direct and very revealing questions, which will help you take an honest look at your dream. The objective is to help you attain that dream, not to keep you from pursuing it.

A sample of the questions follows:

• Are you a leader?
• Do you have will power and self-discipline?
• Are you prepared to lose your savings?
• Do you know what skills you will need in order to have a successful business?
• Have you ever worked in a business similar to the one you want to start?
• Will your product or service be competitive based on its quality, selection, price or location?
• Do you know who your customers will be?

It is important that you take an honest, objective look at your dream. If you are still convinced that it is what you want to do, it is time to convert the dream to a plan.

Building a Business Plan

Having made the thoughtful decision to convert your dream into a real business is an important step. At this point, you have convinced yourself that there is business to be done and that you want to do it. A business plan will help you firm up the details of how that will work. And, it will help you convince others that your dream can and should become a reality.

Road Map

A business plan is a road map for how to get to where you want to go. There are a lot of decisions you will need to make along the way. None of them will be as monumental as the decision to "do business," but each decision is important and each one, if well thought out, will help improve your probability of success.

Some questions to consider in organizing your business plan are:

• What, exactly, will the product or service be?
• What legal format will be best for the business-proprietorship, partnership, "S" corporation, "C" corporation, or limited liability corporation?
• Where will the business be located?
• How will the business be financed?
• Where will I get help when I need it?

Financing Your Business

Money is always an issue when starting a business. Generally, small businesses are started on the savings of the owners. Family, friends, and others then supplement this capital. Most start-ups look for additional financing fairly quickly. The 1998 issue of the Tennessee District Small Business Resource Guide has a specific section dealing with "Financing Your Business Start-Up." This publication also has excellent references for regulations and other assistance available to small business start-ups.

Some Help

If you expect to get financial support from friends, family, or a financial institution, be prepared to present them with a reasonably formal business plan. There are many sources of help with business plans. In an earlier article (Memphis Business Journal's, Small Business Start-Up Guide, "Creating a Professional Advisory Team," November 20, 1998), we discussed the importance of getting financial advice at the very beginning of your deliberations about the business. A certified public accountant will be an excellent source of such advice and you would be well advised to bring one into your confidence from the beginning. There are also numerous published resources, which will serve you well. One of those is a book entitled Total Business Planning by E. James Burton (John Wiley & Sons, copyright1999). You may also find assistance from other sources such as the Service Corp of Retired Executives (SCORE) or the Memphis Technical Assistance and Resource Center, a partnership between the city of Memphis and NationsBank.

The importance of developing the business plan cannot be over emphasized. The document is valuable. It will permit you to communicate your ideas with potential investors, creditors, vendors, employees, and others. But, the process is at least as important as the document itself. Follow the business planning process given in almost any good planning book or article. That process will cause you to think through lots of start-up issues and answer lots of questions you may not previously have asked yourself. A business plan will greatly improve your probability of success.

Implementing the Dream and the Plan

Once that business plan has been developed and reviewed, it is time to move on and start implementing the plan. Dreams do not implement well. Plans do. Dreams are ends. Plans are means to those ends. Both are important. Both contribute to the success of the business. Each is necessary. Neither is sufficient without the other. But once all the dreaming and planning are over, it is time to get down to business. There are still many tasks to be accomplished.

Estimate the amount of time you will need before you actually begin the business activity, then at least double that amount of time. This exercise will provide for the unanticipated snafus, which may result from licensing procedures, acquiring machinery or supplies and all the other myriad of details that rarely go according to plan.

Site

If you are not already committed to a location for your business, contact a Realtor for assistance in finding the appropriate location. Be sure to discuss with the Realtor both your currents needs and the needs you may have for future expansion. Your Realtor will be familiar with the general area and will provide valuable assistance in finding the location, which is suitable for your type of business. Be certain that you verify zoning requirements to see that your type of business is permitted in the location you are considering.

Recruiting Employees

If you plan to have employees, you should take the time to think through and carefully define the job descriptions for each position. It would be well if you were to write these out. You can contact the local Chamber of Commerce to determine the probable pay scales for the jobs you have defined. You will probably want to place help-wanted ads in local newspapers; place those ads 30 to 45 days before you anticipate the actual employment. You will want time to perform background checks on some, if not all, employees.

Post Office Box

If you want a post office box, it may be necessary to apply at the local branch office as much as eight to 10 weeks in advance of the time the box will be needed. Office furniture and other equipment not stocked by local merchants should be ordered at least six weeks in advance of the time you want it in place.

Before actually starting operations, you will want to contact your insurance agent in order to get appropriate coverages. You may need such things as fidelity bonds or other bonding arrangements, which will take some time to negotiate. You will also want to discuss your liability insurance needs, workman's compensation, and fire insurance. There may be other special needs as well.

Once you have determined a location for your business, you should contact the telephone company to arrange for service. A special representative at the telephone company handles new business accounts. That number can be found in the front of the telephone book. You will probably need to place your order 10 to 12 working days in advance of the time you want service to begin. Be prepared to pay a deposit for the service.

Utilities, Licenses, Permits and Signage

If the other utilities are not a part of the real estate package that you negotiate, you will need to contact your local utility company or companies to arrange for service. Your Realtor may be able to help you with this as well. Be prepared to pay a deposit for these services.

Depending upon the type of business, there may be a number of licenses and permits you will need. Your certified public accountant will be very helpful with most of these. He or she may refer you to an attorney for others.

Stationary and business card as well as signage should not be ordered until after the location and telephone number have been finalized and after any necessary business name approvals have been received. Allow one to two weeks printing and a minimum of one month for sophisticated signage, which by the way, does require a permit.

Conclusion

Being in business for yourself is a wonderful, gratifying experience. Or, at least it can be. But, there are literally thousands of details that must be handled. To improve your probability of success and to minimize the headaches, get all the help you can. The side bar lists some sources of help you should consider. In spite of the problems of starting a small business, it is still a dream of many. And, dreams are meant to be turned into reality.

E. James Burton, Ph.D., CPA, CFE, is Dean of the College of Business and a professor of accounting at Middle Tennessee State University. Burton is a member of the Tennessee Society of Certified Public Accountants,, the state professional organization for more than 8,000 CPAs in government, education, industry, business and public practice and its Nashville Chapter. TSCPA's Nashville Chapter is one of eight chapters across the state with more than 2,900 members in 20 counties. For more information on small business issues, visit the Tennessee Society of CPAs' Small Business Resource Center on the Web at www.tscpa.com.